The latest attempted coup in Turkey has driven down the market and the currency. So much so that lovers of emerging market investments may be tempted to bargain-hunt.
Don’t.
Turkish President Recep Tayyip Erdogan has been drifting away from his commitment to democracy and free markets, and the recent coup seems to have encouraged his worst instincts, rather than his better ones.
Further, Turkey is in a rough neighborhood. At least in the short term, it looks more likely to head towards the downside than the upside.
At first glance, Turkey looks like a potential source for a Currency Stock investment.
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The lira is down 12% over the last year, and could fall further. Meanwhile the stock market is down 8% in Turkish lira terms, so there would seem to be something to go for there, too.
As you know, I generally like the stocks of exporters with weak currency because this weakness increases export margins and has a leveraged effect on earnings.
However, in Turkey’s case, the deeper picture is not so attractive.
For starters, Turkish inflation has been relatively substantial, at 7.6% in the year to June, so much of the benefit to exporters of the currency’s devaluation, is wiped out by this increase in domestic costs.
Then, while the country’s growth rate is satisfactory enough – expected at above 3% in both 2016 and 2017 – Turkey runs a persistent current account deficit, expected at 4.7% of GDP in 2016, according to the Economist’s team of forecasters.
While the budget deficit at 1.8% of GDP is more agreeable – certainly compared to the deficits in many Western economies – this could easily rise with the costs associated with domestic unrest.
I’m conflicted on Erdogan.
When he first came to power in 2002 he was a breath of fresh air. The secular politicians backed by the Turkish military had exhibited very poor budgetary discipline and economic management, and had run Turkey into a position of high debt, rapid inflation, and budget instability that was very damaging.
When Erdogan came to power, he appeared to be a Turkish version of Konrad Adenauer – the German postwar Christian Democrat leader, who by cutting back the state sector and encouraging business, produced the “wirtschaftswunder” – aka the economic miracle that propelled Germany into the prosperous country it is today.
In principle, there would appear to be no reason why a Muslim equivalent of a “Christian Democrat” – religiously oriented, but moderately so, and dedicated to sound economic management, government integrity and prosperity – should not provide an attractive model for other Middle Eastern countries. The left regarded Adenauer as an authoritarian, too, but this was always an illusion created by his dour personality and extraordinary ability to win elections over his 14-year term in office.
For his first decade in office, Erdogan did a decent job handling Turkey’s economy, remained relatively pro-Western in his foreign policy orientation, and appeared to be a bastion of stability in the very troubled Middle Eastern region.
However, in the last five years, he has shown an unpleasant tendency toward authoritarianism (last year’s November election was pretty questionable) – not to mention press freedoms and civil liberties that have been endangered.
In foreign policy, he has shown some hostility to Israel via an ill-advised friendship with the terrorist group Hamas which holds authority over the Gaza Strip.
Ideally, Turkey will avoid a return of the pre-2001 secularists, who were incompetent socialists economically and would not have popular backing among the fairly devout Turks. Certainly a military regime would be unattractive, as well.
Instead a liberalized Erdogan regime would be a much healthier option in order to make way for a more moderate leader, such as Abdullah Gul, the previous President. Unfortunately, the flow of Turkish politics seems to be in the other direction, with Erdogan clamping down after the coup’s failure, and arresting thousands among the opposition. Whether these detainees were actually involved in the coup, or are simply on a list that Erdogan wants out of his opposition, we may never know.
A more authoritarian Turkey will deter foreign investment, which will be bad for the economy.
It will also become more corrupt, as the opposition forces that would normally expose corruption will be cowed into submission.
Even after the lira’s fall, therefore, it is not worth the risk of investing in the Turkish market.
While I don’t entirely oppose investing in countries run by authoritarian regimes, their protections against corruption and kleptocracy had better be really top-notch for me to advise taking any chances.
Erdogan’s increasing authoritarianism is sad news for the Turkish people, overall, as well as the Middle East in general. Not only will their civil liberties be curtailed, but it is likely Western governments will impose penalties to deter foreign investment in Turkey, thus destabilizing Turkey’s economy, which is none too robust as it is.
Turkey does not need to enter the EU to be successful, but it does need to be stable, market-oriented, and governed by the rule of law. Without these key factors, foreign companies will avoid investing there, and local companies won’t prosper or expand internationally.
Under Erdogan’s increasingly high-handed rule, there is no guarantee that Turkey’s economy won’t reach a dire state – a state that investors should aim to avoid, as well.
Good investing,
Martin Hutchinson
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